A Financial Engine Shut-off Switch—A Commentary by Ian Ayres ’86

The following commentary was published in The New York Times on April 23, 2009.

A Financial Engine Shut-off Switch
By Ian Ayres ’86

AOL Autos has a great article on new technologies that shut off your engine if you fail to make payments on your car loan.

The devices, which are required by a growing number of subprime loan contracts, are the product of a revolution in telematics — the blending of telecommunications and wireless technology.

The devices are usually controlled remotely by the dealer or lender and are linked to the vehicle’s powertrain. They usually cut out the power several days after the payment is due. Before the deadline, the driver is treated to a concert of tones and flashing indicators signaling that the deadline is approaching. There are also warnings after the deadline has passed.

Sounds like a good idea to me. But then again Barry Nalebuff and I got into trouble a few years back defending Acme Rent-A-Car (its real name) for automatically penalizing renters $150 if (GPS showed) they drove the cars faster than 80 m.p.h.

Both technologies are examples of commitment devices, which help drivers commit to particular behaviors. Both should only be used with abundant ex ante disclosure so that the drivers know what they’re signing up for.

One concern with the financial cut-off switches is that they might leave a driver high and dry when she really needs the car — say, to drive to the hospital in an emergency. But the AOL article says:

Numerous safeguards are built in, the manufacturers say. The devices won’t shut down the engine while the vehicle is moving, and consumers can extend the car’s operation in an emergency. Contracts spell out that the device is present on the vehicle. “We have customers sign a disclosure before they get into the car, saying the unit is on the car and how it is going to function,” Schwarz said. “The disclosure form is four or five pages long, and the customer checks off every box.”